HMRC plans to check the business records of 50,000 SMEs a year for four years, imposing penalties on businesses whose records do not conform to their high expectations.
HMRC is introducing a programme of business record checks (BRCs) that will review both the adequacy and accuracy of business records within the small and medium enterprise (SME) sector.
HMRC says that its random enquiry programme indicates that poor record keeping is a problem in around 40% of all of SME cases which could lead to a loss of tax in two million SME cases annually. It is therefore planning to use its powers to check business records in up to 50,000 cases annually, starting in 2011. There will be penalties for significant record keeping failures and the aim is to bring about an improvement in record keeping across the SME population.
How the BRC will be carried out
It is intended that BRCs will be prearranged with at least seven days' notice. Traders and their agents will be made aware in advance and appointments made.
Typically, a BRC will consider a 'sample' of the records kept (not the records in totality), to check that (1) a full and clear record is being kept of all business 'money in' and 'money out', and (2) the records allow an accurate interpretation to be made as to the nature of those receipts and expenditures.
HMRC plans to select cases for a BRC on the basis of risk assessment, focusing on businesses that have features associated with poor record keeping. However, a small proportion might be selected at random.
HMRC started carrying out a number of BRCs in April 2011 on a 'test and learn' basis. The early results, as gleaned from the letters which have been issued to businesses after the BRC visit, suggest HMRC has a template letter and is recommending improvement in common areas across the board.
For example, it is understood that the letters all recommend that sales invoices should be issued with consecutive numbers and a cash book maintained. Other recommendations suggest a drawings record should always be kept, a mileage log maintained and business records written up at least weekly.
The letters conclude with the warning that 'one of our officers may visit you again in the next three months to check whether you have made improvements in the areas mentioned'.
In anticipation of the BRC exercise, HMRC has issued guidance material:
Keeping records for business – what you need to know
This HMRC Factsheet (TH-FS11) is commendably brief, but is confusing. It mixes the cash basis and accruals basis and ignores several fundamental issues such as stock. A business which followed this leaflet as a guide could well fall short of the minimum appropriate for its type and size of business.
Find out what records you should be keeping
This record keeping tool seems to go to the other extreme. It expects a small business to have a comprehensive record keeping system and a tight system for internal control, for example it suggests that the owner should carry out tasks such as sales ledger reconciliations.
Business profits toolkit
Not yet published.
Record keeping (self employed)
The wording of the consultation document suggests that HMRC has smaller enterprises and particular types of business in its sights and at this stage it seems unlikely that the BRC programme will trouble those businesses that are well organised.
In this connection it is interesting to note the internal guidance issued by HMRC to Inspectors which includes the following extract:
"A precise definition of unsatisfactory book-keeping cannot be given. However the following are examples of more obvious features which should be fairly easy to spot.
- untidy and unanalysed records such as a box full of invoices, bank statements, cheque stubs and so on, not supported by an analysis book such as 'Simplex';
- analysis books not completed regularly – a system whereby the books are written up more than four weeks after the event is not as reliable as books completed contemporaneously;
- cash books not written up in date order indicating that the books may have been written up from the bank statements;
- significant unanalysed and un-vouched round sums."
In practical terms, HMRC will expect to see that a business is keeping full and accurate records of its invoices, receipts, petty cash, general expenses and so on. Inspectors will be looking at records relating to the current year and potentially can go back six years. Failure to comply with HMRC's standards will lead to further inspections and some organisations will face fines.
This is the first time that the tax authorities will be looking at records for the current year. Until now, HMRC has only scrutinised a firm's tax affairs if it thinks the business has filed an inaccurate return and is paying too little tax. This new approach heralds a sharply toughening attitude to SME record keeping by HMRC.
Record checking in this way comes within HMRC's interventions armoury which sits alongside its power to enquire into tax returns.
A number of insurance companies specialise in offering cover in respect of the professional fees in dealing with such HMRC activity and Smith & Williamson can provide details of a group policy available to tax compliance clients.
As a basic minimum, businesses need to be organised and methodical in their record keeping. Smith & Williamson's top five tips include:
- Time Keep records going back at least six years.
- What to keep Invoices, bank statements, paying in books, details of purchases, expense details and so on.
- Personal vs. business Anyone who makes a claim for the use of assets which they use personally as well as for the business - a car being a typical example - must be scrupulous in allocating personal and business useage and have the necessary supporting paperwork to back up their claim.
- Be regular Keep on top of your expenses and record keeping. This will make it easier and more accurate. Also, HMRC is more likely to believe contemporaneous records.
- Avoid estimates If you have to estimate an amount, make sure you can provide suitable evidence.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.